A Summer Break for the Fund Rally?


As summer picked up steam, the stock rally cooled. With conflicting reports on the economy's health, stocks ended June with slight gains, a sharp contrast to the healthy advances posted in the prior two months. To spur stronger, steady economic growth and ward off deflation, the Federal Reserve lowered the key Fed funds interest rate on June 25 by 25 basis points, to a 45-year low of 1%.

Though the Fed noted some signs of improvement in the economy, stocks fell on the news. Fixed-income traders hoping for a larger rate cut kept selling bonds, causing yields to spike. For the month, the average diversified equity fund edged up 1.5%, a shade higher than the 1.3% return for Standard & Poor's 500-stock index. (For full results of more than 9,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

Funds investing in Japanese companies were June's best performers. They jumped 7.8% as investors anticipated improving corporate earnings and economic growth in the country. Profunds Ultra Japan (UJPIX), which gained 15% in June, was the group's top performer. Optimism about a recovery in Japan spread to other Asian markets, pushing diversified Pacific-Asia portfolios up 6% in the month. Diversified emerging-markets funds rose 5%.

SMALL-CAP GEMS. Among domestic players, small-cap funds outperformed their large-cap brethren, as investors continue to seek higher returns from tiny outfits. Small-cap growth funds gained 2.9% in June, vs. an average 1% for large-cap growth funds. Apex Mid Cap Growth Fund (BMCGX), which invests in volatile micro-cap issues, gained 12.9% in June and is the No. 1 fund of any kind for the year so far, with a 106.9% surge.

The only equity-fund group posting a loss in June was natural resources, which slipped 0.9% after racking up a hefty 11% gain in May. Many fixed-income categories also lost money in the month, paced by a 1.4% drop in long-term government bond funds.

The bright spot in fixed-income was high-yield bonds. This segment, which invests in issues with credit ratings of BB or less, gained 2.4% in June and 13.7% so far this year. Fidelity Advisor High Income Advantage (FAHYX) was the top-performing high-yield bond fund in June with a 4.6% gain. It's also the category's top performer for the second quarter (up 16.3%) and year-to-date (up 28.7%).

CHEER ALL AROUND. Looking at fund performances for the second quarter and so far this year, investors have good reason to cheer since all groups showed positive returns for both periods. U.S. diversified equity funds climbed 17.1% in the second quarter and 13.2% year-to-date, beating the S&P 500's 15.4% and 11.7% returns, respectively.

From April to June, technology funds led the way with a 25.4% jump, just a tick over their six-month mark of 25.3%. For the most recent quarter, the tech-heavy Nasdaq composite index had a 21% rise. Communications funds followed close behind, with a solid 23% return. Tech funds were the leader for the first six months, followed by Latin American equity funds, which have risen 20.8% so far this year.

Fixed-income portfolios also posted healthy returns in the last three months and year-to-date. The top category was emerging-markets bonds, with a 11.2% gain in the quarter and 19.9% for the year. Another strong area was convertible-bond funds, which rose 10.2% in the quarter and 11.8% year-to-date.

A-Rated Equity Funds for June:

1st Source Monogram Special Equity

ABN AMRO Mid Cap N

ABN AMRO Veredus Aggressive Growth N

AIM Opportunities I A

ARK Small Cap Equity A

Aegis Value

Al Frank

Amer Century Equity Inc Inv

Amer Century Glbl Gold Inv

Ariel

Armada Small Cap Value I

Artisan Mid Cap

Artisan Small Cap Value

BNY Hamilton Sm Cap Gr Inv

Baron Growth

Bjurman Barry Micro Cap Growth

BlackRock International Opportunities Inv A

BlackRock US Opportunities Inv B

Boston Partners Small Cap Value II Invest

Brazos Micro Cap Y

Bridgeway Aggressive Investors 1

Bridgeway Ultra Small Company

Bridgeway Ultra Small Company Tax Adv

Bruce

Buffalo Small Cap

CGM Focus

CGM Realty

Calamos Growth A

Clipper

Cohen & Steers Equity Income C

Commonwealth New Zealand

Conseco Equity Y

Delafield

Dodge & Cox Balanced

Dreyfus Premier Emerging Markets A

Dreyfus Premier Greater China A

Driehaus Asia Pacific Growth

Driehaus Emerging Markets Growth

Eaton Vance Wldwd Hlth Sciences A

Emerald Select Banking & Finance A

Evergreen Precious Metals Holdings A

Excelsior Mid Cap Value

FBR Small Cap Financial A

FBR Small Cap Value A

FMI Common Stock

FMI Focus

Fidelity Advisor Mid Cap T

Fidelity Japan Small Co

Fidelity Low Priced Stock

Fidelity New Millennium

Fidelity Select Biotechnology

Fidelity Select Gold

Fidelity Select Medical Systems & Equipment

Fidelity Southeast Asia

Fifth Third Micro Cap Value Instl

First American Real Estate Securities Y

First American Small Cap Growth Opport Y

First Eagle Global A

First Eagle Gold

First Eagle Overseas A

Franklin Biotechnology Discovery A

Franklin Gold & Precious Metals A

Fremont US Micro Cap

Fremont US Micro Cap Instl

GMO Emerging Countries III

Gabelli Gold

Gabelli Westwood Mighty Mites AAA

Hartford Mid Cap A

Heartland Value

Hennessy Cornerstone Growth

Heritage Mid Cap Stock A

Hotchkis & Wiley Mid-Cap Value I

ICON Energy

ICON Information Technology

ICON Leisure and Consumer

IMS Capital Value

ING Precious Metals

ING Russia A

INVESCO Leisure Inv

Ivy Global Natural Res A

JPMorgan Mid Cap Value I

Janus Small Cap Value Inv

Kinetics Internet

Legg Mason Eq Tr Special Invmnt Prim

Liberty Acorn Z

Liberty Newport Greater China A

Liberty Small Cap Z

MFS International New Discovery A

MFS Strategic Value A

MainStay Equity Income B

Mairs & Power Growth

Matthews Asian Growth & Income

Matthews China

Matthews Korea

Matthews Pacific Tiger

Meridian Growth

Meridian Value

Merrill Lynch Global Small Cap B

Merrill Lynch Natural Resources A

Morgan Stanley Health Sciences Trust B

Morgan Stanley Instl Small Cap Growth Inst

Morgan Stanley Instl Small Company Gr B

Mosaic Equity Tr Mid Cap

Munder Healthcare B

NI Numeric Investors Emerging Growth

Navellier Perf Mid Cap Growth

Needham Growth

Neuberger Berman Genesis Inv

Nuveen NWQ Multi Cap Value R

OCM Gold

Oakmark Equity & Income I

Oakmark International Small Cap I

Oakmark Select I

Oberweis Micro Cap

Olstein Financial Alert C

Oppenheimer Developing Markets A

Oppenheimer Gold & Special Minerals A

Osterweis

PBHG Mid Cap

PIMCO RCM Biotechnology D

PIMCO RCM Global Healthcare D

Parnassus Income Equity Income

Perkins Discovery

Perritt Micro Cap Opportunities

Phoenix-Duff & Phelps Real Estate Sec A

Prudential Natural Resources A

Quaker Aggressive Growth A

RS Diversified Growth

RS Partners

Reserve Private Equity Small Cap Growth R

Rockland Small Cap Growth

Royce Low Priced Stock

Royce Micro-Cap Inv

Royce Opportunity Inv

Royce Special Equity

Royce Total Return

Royce Trust & Giftshares Inv

Rydex BioTechnology Inv

Santa Barbara Bender Growth Y

Scudder Gold & Precious Metals S

Scudder Health Care S

Scudder Micro Cap Invest

Security Capital European Real Estate

Security Capital US Real Estate

Security Mid Cap Growth A

Security Mid Cap Value A

Sentinel Small Company A

Smith Barney Aggressive Growth A

State Street Research Aurora A

State Street Research Global Resources A

Stratton Monthly Dividend REIT

Strong Advisor Small Cap Value Z

T Rowe Price Capital Appreciation

T Rowe Price Health Sciences

T Rowe Price Intl Discovery

TCW Galileo Asia Pacific Equity I

TCW Galileo Value Opportunities I

Thompson Plumb Growth

Tocqueville Gold

Tocqueville Small Cap Value

Touchstone Emerging Growth A

Turner Micro Cap Growth

Turner Small Cap Value

US Global Accolade Regent Eastern Euro

USAA Precious Metals & Minerals

Undiscovered Managers REIT Instl

Value Line Emerging Opportunities

Vanguard Capital Opportunity

Vanguard Health Care

Vanguard Precious Metals

WM West Coast Equity A

Wasatch Core Growth

Wasatch Micro Cap

Wasatch Small Cap Growth

Wasatch Small Cap Value

Wasatch Ultra Growth

Wells Fargo Montgomery Emrg Mrkts Focus I

Westport R

Westport Select Cap I

iShares MSCI Malaysia Index

By Karyn McCormack in New York


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